Auditing Challenges and Talent Trends for Public Companies

Remarks as prepared for delivery

I am delighted to be here with you today not only because of the opportunity to meet with many distinguished corporate leaders but also because I am an investor in NYSE-listed companies. Before I begin, I need to provide the required PCAOB disclaimer. The views I express here are my own and do not necessarily represent the views of the PCAOB Board, other Board Members, or PCAOB staff.

I came to this country over 30 years ago from Macau to attend college in rural Pennsylvania. It was during my first cold Pennsylvania winter that I started learning more about the U.S. financial system. I remember reading the newspaper each morning before class and looking at how various U.S. equities performed the day before on the various exchanges. It didn’t take me long to understand that the NYSE is the most prominent exchange in the world. I didn’t realize then that I would later share other connections with NYSE.

First, your vision statement on the NYSE’s website really resonated with me. For those of you who are not familiar with it, I will read an excerpt: “[t]he NYSE is capitalism at its best, the belief that the free and fair markets offer every individual the chance to benefit from success. We set the standard with our unparalleled trading platform, enabling entrepreneurs, innovators, and investors to raise the capital they need to change the world. We want to share our vision for good governance, transparency, and trust with our listed community, furthering the responsible development of global business.” I too believe that good governance, transparency, and trust enable the functioning of our free and fair capital markets.

Second, in preparation for this meeting, I read the history of the NYSE where I learned that the NYSE helped the first Secretary of the Treasury - Alexander Hamilton – implement his fiscal policy of paying Revolutionary War debt using federally issued bonds. My first job at Treasury was to run the Treasury’s auction operations through which it issues trillions of dollars annually in Treasury marketable securities to finance the federal government’s operations and programs. So, I am quite familiar with the history of Alexander Hamilton and his fiscal policy and financial vision.

Finally, last week I learned that the NYSE was a pioneer in corporate governance, among other things. It was the NYSE that first required in 1978 all its listed companies to have audit committees comprised entirely of independent directors.

Therefore, I truly feel privileged to be here to share some of my views.

Touchpoint on NOCLAR

I understand that many of you are interested in the PCAOB’s NOCLAR proposal. After the PCAOB decided this past March to re-open the comment period and conduct a virtual NOCLAR roundtable, I reached out to the NYSE because I felt that audit committees and investors were underrepresented. My goal was to conduct a listening tour to hear first-hand what audit committees and actual investors want. I also had found the NYSE’s August 7, 2023, comment letter to be thoughtful - so thoughtful that I quoted an excerpt in my April 9, 2024, public statement on the PCAOB’s Firm Reporting Proposal. I said (and I’m now quoting myself):

. . . I have been reading comment letters on our various proposals as well as meeting issuers, audit committee members, and other stakeholders to better understand what disclosures actual investors want. One comment letter on a different proposal stood out. This commenter [the NYSE] wrote ‘more disclosure does not necessarily mean better disclosure, especially when the additional disclosure is difficult and expensive to prepare and does not meaningfully improve an investor’s ability to assess a company’s business and operations.’¹

I could not have said it any better than the NYSE. 

The re-opened comment period closed on March 18, 2024, and I expect that PCAOB staff has assessed the comments received and may be preparing its recommendation for the Board. While I do not know what PCAOB staff will recommend and I am not presaging staff’s recommendation, I am hopeful that the recommendation will, to paraphrase the NYSE, result in better disclosure that is less difficult and expensive to prepare and will meaningfully benefit investors.

The “Accounting Talent Crisis”

Now, I want to change topics as I understand that one of the areas you and your audit committees are interested in is the “accounting talent crisis.”  This is a topic that I have lost sleep over because a vibrant and resilient U.S. capital market system needs a strong public company accounting profession pipeline. There has been a chronic decline in accounting graduates and CPA candidates since 2016. Most recently, we heard reports that just over 67,000 individuals took the CPA exams in 2022, a historic low over the past 17 years. To put this number into perspective, the number of individuals sitting for the CPA exams has declined by 34% since 2016 when a little over 100,000 individuals sat for the CPA exams. The Wall Street Journal reported in December 2022 that over 300,000 U.S. accountants and auditors have left their jobs in the past couple of years, a 17% decline in industry employment. To top it off, the U.S. Department of Labor’s Bureau of Labor Statistics projected approximately 126,500 openings for accountants and auditors each year, on average. If this alarming trend continues, the U.S. labor market will soon have 50% or more of the accountant openings unfilled each year.²

So how do we arrest and reverse this alarming trend? What can the PCAOB do? What can you do? What can we do together?

Some have posited that the “accounting talent crisis” stems from a rule adopted by all State Boards of Accountancy requiring CPA licensure candidates to have completed 150 credit hours (or five years) of university study instead of 120 credit hours (or four years) of university study. A recent article by the MIT Sloan School of Management cited new research finding that the 150-hour rule does not result in higher quality and that it has “dampened new entry into the field – particularly among minorities.”³ While I do not question the research findings, I do not believe that convincing 50+ State Boards of Accountancy to change the 150-hour rule is a viable, near-term solution. 

So, what can the PCAOB do? The 107^th Congress gave the PCAOB a tool to help address this growing crisis. Specifically, the Sarbanes-Oxley Act of 2002 provides that the civil money penalties the PCAOB collects shall be used to fund a merit scholarship program for graduate and undergraduate students enrolled in accredited accounting degree programs.⁴ In 2022, the PCAOB announced that 250 students were selected to receive a $10,000 scholarship for the 2022-2023 academic year.⁵ In 2023, the PCAOB announced that 369 students were selected to receive a $10,000 scholarship for the 2023-2024 academic year – a year-over-year 48% increase in the number of scholarships.⁶ I expect that we will announce this summer the number of scholarships for the 2024-2025 academic year.

I have also expressed concern about PCAOB proposals that I believe have the potential to exacerbate the broader “accounting talent crisis.”  For example, last September I supported with reservations the issuance of proposed amendments to a PCAOB Rule governing contributory liability.⁷ In my statement, I expressed concern whether the proposal will do more harm than good for investors in the long run. The proposal acknowledged that one potential unintended consequence is that it could unintentionally discourage auditors from accepting important audit roles if they fear being held liable, leaving those roles to be accepted by less cautious or qualified individuals. I stated that a more likely unintended consequence relates to retention in that junior audit professionals might choose to leave the public company auditing profession altogether. I stated that we need to exercise greater care so that we do not make the public company auditing profession so risk-ridden that the best and the brightest pursue careers elsewhere. 

In addition, I am concerned about the way the PCAOB carries out its enforcement program. As reflected in the PCAOB’s Strategic Plan for 2022-2026, the PCAOB Board decided to take a more assertive approach in its enforcement program by imposing more meaningful sanctions to help deter wrongdoing by audit firms and audit professionals.⁸ The PCAOB has also taken other steps to sharpen the bite of its enforcement program that I believe could extend the accounting talent crisis to senior audit personnel. Beginning in late 2022, the PCAOB included language in its settled enforcement orders that prohibits, for example, professional audit staff from seeking any form of reimbursement, indemnification for, or other offset, to PCAOB civil money penalties. This means that if an engagement partner agrees to pay the PCAOB a civil money penalty because of audit deficiencies under his or her watch, that engagement partner cannot be reimbursed by his firm or by D&O insurance. One possible spillover effect is that the engagement partner and others like the engagement partner might decide to leave the public accounting profession because the financial risk in combination with the reputational risk may become too much to bear. 

I believe that we can fulfill our mission of investor protection by helping audit firms and their personnel succeed, which will also benefit investors and enhance the resilience and robustness of our capital market ecosystem. I call this the “carrot” approach, which I believe is the best approach for most firms that are deeply committed to audit quality. But not all firms are equally committed to audit quality, and even the best of firms may have lapses in audit quality. This is where the “stick” comes into play. The PCAOB Board has broad statutory authority to sanction firms and their personnel for lapses in audit quality that violate, for example, PCAOB auditing standards and rules. This “stick” is important because it can help incentivize firms and their audit personnel to diligently follow all applicable requirements, and, in doing so, promote audit quality and investor protection. However, Congress gave the PCAOB Board discretion – some might call it “prosecutorial discretion” – on whether to seek sanctions against a firm, its personnel, or both. I believe that not all violations of PCAOB standards and rules are the same and that circumstances may warrant the exercise of “prosecutorial discretion.”   

So, what else can be done? What can we do together?

I believe it comes down to at least two things. The first is money; if public companies and audit firms start paying their entry level accountants more, it could induce more college students to select accounting as their major. In an October 2023, article titled “Why No One’s Going Into Accounting,” the Wall Street Journal (WSJ) reported that the median, inflation-adjusted pay for young accountants has stagnated, according to a WSJ analysis of salary data compiled by the U.S. Census Bureau, and that the pay disparity between accounting on the one hand and finance, marketing, logistics, and consulting on the other hand, is a major reason why fewer individuals are choosing accounting careers.⁹ The second thing that can be done is advocacy. We all need to do a better job describing what accounting professionals do. Recently, I have had the opportunity to share my story through the Center for Audit Quality. I did it not to brag about my achievements, but to show others that the accounting profession offers anyone, even those from a humble background, an opportunity to ascend. I believe in the greatness of the accounting profession. We need to help high school and college students understand that the accounting/auditing professions are more than just numbers and are more akin to detective work where they can discern trends and find truth in the data. It is ultimately about deciphering problems and solving them innovatively. Let’s work together to solve this crisis.

Thank you.

If time permits, I am happy to answer questions.